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    Emerging economies need end to trade war

    Synopsis

    The MSCI Emerging Markets Index trailed its developed-market counterpart for 8 successive months.

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    The gauge for the financial subgroup is trailing the broader emerging-market index by 4.2 per cent this year.
    Equity investors clamouring for interest-rate cuts in emerging economies are getting a wake-up call: monetary easing is failing to revive growth impaired by the trade war.

    The following four factors suggest what’s needed for emerging market stocks to post a sustained recovery isn’t monetary easing, but a combination of fiscal stimulus and an end to the trade war.

    LAGGING, YET EXPENSIVE
    The MSCI Emerging Markets Index trailed its developed-market counterpart for eight successive months until September as startof-the-year expectations for a quick resolution of the tariff conflicts failed to materialise.

    Yet developing-nation stocks have remained expensive in relative terms. That’s because lower interest rates put local currencies under pressure, and diminish the dollar value of earnings.

    DOLLAR’S INFLUENCE
    Local currencies struggle to compensate global investors for their exposure to developing-nation stocks. Even when carry returns are accounted for, gains from local currencies have lagged their developed-market peers by over 1 percentage point in 2019.

    This month has brought some reprieve. With the dollar heading for its biggest monthly loss since January 2018, emerging-market currencies have stabilised.

    FINANCIAL BAGGAGE
    With financial-sector stocks accounting for a quarter of the MSCI gauge, the impact of lower interest rates on those shares is taking a toll on overall equity returns.

    The gauge for the financial subgroup is trailing the broader emerging-market index by 4.2 per cent this year.

    BONDS BENEFIT

    Dollar-denominated bonds are luring investors wary of currency risk, while local bonds appeal to those betting on rate cuts.

    That’s left equities to bear the brunt of global-growth concerns. More monetary-policy easing may deepen this phenomenon, suggesting that growth impulses would have to come from other sources such as fiscal stimulus and an end to the trade war.
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